Business Context and Reporting Period
Company: Natural Resource Partners L.P.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2006
Business Overview: The Partnership owns and manages coal properties in Appalachia, the Illinois Basin, and the Western United States. It does not operate mines but leases coal reserves to operators in exchange for royalty payments. As of September 30, 2006, the Partnership had 180 leases with 69 lessees.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2006 | Nine Months Ended Sep 30, 2006 |
|---|---|---|
| Total Revenues | $41.5 million | $129.0 million |
| Net Income | $25.3 million | $78.8 million |
| Net Income per Unit (Common & Subordinated) | $0.85 | $2.72 |
| Operating Cash Flow | $33.4 million | $102.5 million |
| Distributable Cash Flow (Non-GAAP) | $31.0 million | $95.5 million |
| Total Debt (Long-term + Current) | $309.95 million (as of Sep 30, 2006) | |
| Cash and Cash Equivalents | $60.8 million (as of Sep 30, 2006) | |
| Coal Production | 12.8 million tons | 40.2 million tons |
| Average Royalty per Ton | $2.88 | $2.80 |
Material Changes vs. Prior Period
- Revenue Growth: For the nine months ended September 30, 2006, total revenues increased 11% to $129.0 million from $116.7 million in the prior year period. Coal royalty revenues rose 7% to $112.5 million, driven by higher prices despite a slight decrease in production in some regions.
- Profitability: Net income increased 18% to $78.8 million for the nine-month period, compared to $66.9 million in 2005. Operating income rose 19% to $88.2 million.
- Production Variance: Total coal production increased 2% to 40.2 million tons. Significant regional shifts occurred:
- Appalachia: Production decreased 2% (32.7M tons vs 33.2M tons), but revenues increased 4% due to higher prices in Central Appalachia.
- Illinois Basin: Production increased 14% and revenues increased 33%.
- Western (Powder River Basin): Production increased 22% and revenues increased 40%.
- Acquisitions: The Partnership made significant acquisitions in 2006, including the Williamson Development (phases 2 and 3), James River, Allegany County, and coal preparation plants (Red Fox and Coal Mountain) via a joint venture with Sedgman USA. Total investing cash outflows were $101.1 million.
- Debt Levels: Total debt increased from $231.3 million at year-end 2005 to $309.95 million at September 30, 2006, primarily due to new senior note issuances and credit facility borrowings to fund acquisitions.
Guidance, Outlook, and Risks
- Management Commentary: Management notes that while coal prices have softened slightly following a mild winter, the bulk of coal is sold under long-term contracts, insulating current results. They expect royalty revenue per ton growth to slow compared to the record highs of the previous two years, with future growth relying more on acquisitions.
- Outlook: The Partnership expects increased demand for mid- to high-sulfur coal as utilities add scrubbers. The Williamson Development property in Illinois is expected to reach full production by late 2007.
- Distributions: On October 17, 2006, the Partnership announced an increase in the quarterly distribution to $0.85 per unit (from $0.82), payable November 14, 2006. This represents an annualized rate of $3.40 per unit.
- Subordinated Units: A mandatory conversion of one-third of outstanding subordinated units into common units is scheduled for November 14, 2006.
- Risks:
- Commodity Price Risk: Revenue is dependent on lessees' ability to sell coal at profitable prices. A sustained drop in coal prices could make some reserves uneconomic to mine.
- Interest Rate Risk: The Partnership has $63 million in variable-rate debt. A 100 basis point increase in LIBOR would increase annual interest expense by $630,000.
- Environmental Liability: While lessees are responsible for compliance and indemnify the Partnership, the Partnership retains potential liability for surface conditions on some properties.
- Unusual Items: The adoption of FAS 123R (Share-Based Payment) resulted in a one-time charge of $661,000 in the first quarter of 2006, reducing net income per unit by $0.02 for the nine-month period.
Investor Verification Checklist
- Debt Covenants: Verify compliance with the 3.75:1 debt-to-EBITDA ratio and 4.0:1 EBITDA-to-fixed-charges ratio required by the credit facility, especially given the recent increase in debt load.
- Acquisition Integration: Monitor the production ramp-up of the Williamson Development property and the operational status of the new coal preparation plants (Red Fox and Coal Mountain).
- Coal Price Trends: Track spot and contract coal prices in Appalachia and the Illinois Basin to assess the sustainability of the current royalty per ton levels.
- Lessee Concentration: Review the performance of major lessees (Lessee A, B, and C accounted for significant portions of revenue) and any potential disruptions in their operations.
- Subordinated Unit Conversion: Confirm the impact of the November 2006 conversion of subordinated units on the total unit count and per-unit economics.